Chapter 11
CURRENT LIABILITIES
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CA
Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved
11 - 2
C1
DEFINING LIABILITIES
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C1
CLASSIFYING LIABILITIES
Current
Liabilities
Long-Term
Liabilities
Expected to be
paid within one
year or the
company’s
operating cycle,
whichever is longer.
Not expected to be
paid within one
year or the
company’s
operating cycle,
whichever is
longer.
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C1
CURRENT LIABILITIES
Current Liabilities as a Percent of Total Liabilities
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C1
UNCERTAINTY IN LIABILITIES
Uncertainty in
Whom to Pay
Uncertainty in
When to Pay
Uncertainty in How
Much to Pay
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C2
KNOWN LIABILITIES
Accounts Payable
Sales Taxes Payable
Unearned Revenues
Short-Term Notes Payable
Payroll Liabilities
Multi-Period Known Liabilities
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C2
SALES TAXES PAYABLE
Sales taxes are called goods and services taxes
in come countries. On August 31, Harvey Norman
sold materials for $6,000 that are subject to a 10%
goods and services tax (GST).
$6,000 × 10% = $600
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C2
UNEARNED REVENUES
On June 30, Beyonce sells $5,000,000 in tickets
for eight concerts.
On Oct. 31, Beyonce performs a concert.
$5,000,000 / 8 = $625,000
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P1
SHORT-TERM NOTES PAYABLE
A written promise to pay a specified
amount on a definite future date within one
year or the company’s operating cycle,
whichever is longer.
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P1
NOTE GIVEN TO EXTEND
CREDIT PERIOD
On August 23, Brady Company asks McGraw to
accept $100 cash and a 60-day, 12% $500 note to
replace its existing $600 Account Payable.
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P1
NOTE GIVEN TO EXTEND
CREDIT PERIOD
On October 22, Brady pays the note plus
interest to McGraw.
Interest expense = $500 × 12% × (60 ÷ 360) = $10
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P1
NOTE GIVEN TO BORROW
FROM BANK
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P1
NOTE GIVEN TO BORROW
FROM BANK
On Sept. 30, a company borrows $2,000 from a
bank at 12% interest for 60 days.
On Nov. 29, the company repays the principal
of the note plus interest.
Interest expense = $2,000 × 12% × (60 ÷ 360) = $40
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END-OF-PERIOD ADJUSTMENT
TO NOTES
P1
Note
Date
End of
Period
An adjusting entry
is required to
record Interest
Expense incurred
to date.
Maturity
Date
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P1
END-OF-PERIOD ADJUSTMENT
TO NOTES
On Dec. 16, 2011, a company borrows $2,000 from a bank at
12% interest for 60 days. An adjusting entry is needed on
December 31.
On Feb. 14, 2012, the company repays this principal and
interest on the note.
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P2
PAYROLL LIABILITIES
Employers incur
expenses and
liabilities from
having employees.
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P2
RECORDING EMPLOYEE PAYROLL
DEDUCTIONS
An entry to record payroll expenses and deductions for an
employee in Singapore might look like this.
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C2
MULTI-PERIOD KNOWN LIABILITIES
Includes Unearned Revenues and Notes Payable
Unearned Revenues from
magazine subscriptions
often cover more than one
accounting period. A portion
of the earned revenue is
recognized each period and
the Unearned Revenue
account is reduced.
Notes Payable often
extend over more than one
accounting period. A threeyear note would be
classified as a current
liability for one year and a
long-term liability for two
years.
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P4
ESTIMATED LIABILITIES
An estimated
liability is a known
obligation of an
uncertain amount,
but one that can
be reliably
estimated.
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P4
WARRANTY LIABILITIES
Seller’s obligation to replace or correct a product
(or service) that fails to perform as expected within a
specified period. To comply with the full disclosure
and matching principles, the seller reports expected
warranty expense in the period when revenue from
the sale is reported.
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P4
WARRANTY LIABILITIES
On Dec. 1, 2011, a dealer sells a car for $16,000 with a
maximum one-year or 12,000 mile warranty covering parts.
Past experience indicates warranty expenses average 4%
of a car’s selling price.
On Jan. 9, 2012, the customer returns the car for repairs.
The dealer replaces parts costing $200.
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C3
ACCOUNTING FOR
CONTINGENT LIABILITIES
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C3
POSSIBLE
CONTINGENT LIABILITIES
Potential Legal Claims – A potential claim is
recorded if the amount can be reliably estimated and
payment for damages is probable.
Debt Guarantees – The guarantor usually
discloses the guarantee in its financial statement
notes. If it is probable that the debtor will default, the
guarantor should record and report the guarantee as
a liability.
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A1
TIMES INTEREST EARNED
Times interest
=
earned
Profit before interest expense
and income taxes
Interest expense
If profit before interest and taxes varies greatly from
year to year, fixed interest charges can increase the
risk that an owner will not earn a positive return and
be unable to pay interest charges.
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END OF CHAPTER 11